In late 1996 and early 1997, in the face of a slowing economy, deficits in the budget, trade and current accounts, and weakness in the financial system, the Bank of Thailand insisted that it was ready to go to war.
Trucks carrying sacks of rice queue up in front of a rice mill in Buri Ram’s Prakonchai district where farmers mortgaged their crops under the government’s rice mortgage scheme late last year. Strains are emerging in the programme, as complaints among farmers increase about delayed payments. SURACHAI PIRAKSA
Thailand would defend the currency at 25 baht to the US dollar at all costs, George Soros and his evil hedge fund ilk be damned!
We all know how that war ended. Thailand cried surrender on July 2, 1997 with the float of the baht, and within four weeks, accepted a rescue package from the International Monetary Fund after exhausting the country's foreign reserves in a bid to rewrite basic macroeconomics.
I wonder if Prime Minister Yingluck Shinawatra and her deputy, Finance Minister Kittiratt Na-Ranong, are today in danger of repeating history. Not with the currency or financial supervision, no. This government's Maginot Line is made out of rice, over 18 million tonnes of rice now held in state reserves according to the UN Food and Agriculture Organisation.
The rice pledging scheme would cover ''every single grain'' of rice in the country, Mr Kittiratt boldly promised in September 2011. Farmers have responded with vigour, boosting production sharply in order to take advantage of pledging prices as much as 50% above market rates.
Consider that the pledging programme offers farmers up to 15,000 baht per tonne of white rice paddy with moisture content of up to 15%. Once milled, the government would have to sell the rice at prices of $800 (23,300 baht) per tonne to cover costs, or nearly double the current price of white rice now trading in the world market. Right now, paper losses for the programme are estimated to run at no less than 100 billion baht a year, perhaps reaching as much as 150 billion annually or a staggering 1% of total gross domestic product.
Eventually, the losses will have to be booked somewhere, as the Bank of Agriculture and Agricultural Cooperatives, the state bank responsible for financing the pledging scheme, cannot continue to indefinitely pay farmers with no money paid back in return. These losses will surely be a heavy burden on fiscal planners in the years ahead, particularly considering the government's other goal of setting a balanced budget position within the next five years. Actually, the rice scheme doesn't seem all that onerous in fact when set against the 2-trillion-baht borrowing plan due to go before the parliament over the next several months to help finance new transport infrastructure.
But few debate the need for new roads, railways or airports. What is more questionable is whether the 500 billion baht in debt for the rice pledging programme will be sufficient to ensure self-sustainability. Consider that over the past two years, the government has committed more than 600 billion baht in funds to purchase rice from farmers. And let's assume that the government will be able to recoup 200 billion baht from rice sales last year and this year. So a back-of-the-envelope calculation suggests that with remaining debt of 400 billion baht, the government will have just another 100 billion baht in borrowing room to help finance the pledging programme for the 2013/2014 harvest.
It's hard to believe that this will be sufficient, considering that crop subsidy programmes, which include rice, cassava and rubber, cost no less than 300 billion baht in taxpayer funds per year already. So either the government finds another 200 billion baht, whether from additional rice sales or budgetary legerdemain, or else it acknowledges that total revolving debt for the rice pledging scheme will surely be higher than 500 billion baht.
Somporn Isvilanonda, an economist with the Knowledge Network Institute of Thailand, says it stretches the bounds of credulity to imagine how the government could liquidate its entire rice stocks to repay the debt. At most, the government could sell off perhaps half of its holdings, which in any case would certainly result in prices declining and compounding the losses of the programme.
In the face of so many questions, I do think that the government owes the public an explanation. Yes, the government should assist the poor and needy. But to what end, and at what cost? The 500 billion baht estimate comes from analysis by the Public Debt Management Office (PDMO), which has stated the goal of maintaining the country's public debt under 50% of GDP over the next several years. If the costs of the rice pledging scheme exceed 500 billion baht, then it's likely that overall public debt will also rise above the target. The PDMO has set the 50% level as a goal to help maintain public confidence in the government's commitment to prudent fiscal policy and spending discipline. If ultimately we miss that target, what then?
I can hardly believe that Mr Kittiratt wants to leave a legacy as the finance minister who engineered the largest expansion in public debt in Thai history. But he certainly finds himself trapped by his words _ continue to buy up every single grain of rice, and surely costs and public debt will rise. Back pedal on the rice pledging scheme, either through pledging limits, means testing or price reductions, and the political backlash will surely be enormous.
We can already see the strains emerging in the policy, as complaints among farmers increase about delayed payments under the scheme, even to the point that some must go into additional debt simply to survive. The farmers know as well as anyone about the problems _ pay too much for anything, and eventually something must give way.
Wichit Chantanusornsiri is a senior economics reporter, Bangkok Post.